ISAS or SIPPS? Controlling Your Retirement Savings Pot

Personal pension plans have come in for a lot of criticisms in recent years, as many people have, upon retirement, either been disappointed at the poor returns from their investment, or been unhappy with the low annuity rates they have been forced to accept.

Many investors are looking at the relative merits of SIPPs or ISAs and asking, which would be better?

Understanding SIPPs

SIPPs or self invested personal pension plans, were created with the intention of at least helping investors work to improve the performance of their pension. The idea with a SIPP is that investors who are comfortable with choosing their own investments should be allowed to, instead of relying on financial advisers to recommend funds for them, many of which have proven to be poor performers over the long-term.

Whereas most pension funds consist of pooling investors assets together into collective investment schemes such as unit trusts, investors can also use their SIPP to hold a wide variety of different types of direct assets, including government bonds, company shares, even commercial property.

If any of your investments are performing poorly, you are free to move them, whereas with a standard personal pension, investors are limited to the selection of funds the pension company chooses for you, many of which are uncompetitive when compared to the whole of the market.

The other good news with SIPPs is that they are relatively easy to set up. All you need to do is select the investments you wish to invest in and you can make monthly contributions from as little as £50 per month. You can also transfer an existing pension plan into your SIPP, usually providing you have at least £5,000 in funds already accrued.

The Annuity Problem

Although a SIPP may be a better investment in terms of performance, as with any other type of pension you will be expected to purchase an annuity with your funds when you retire.

An annuity pays out a regular income for the rest of your life, in exchange for your pension lump sum. However, low interest rates and very poor returns from the stock market in recent years have left annuity rates at worryingly low levels.

Fifteen years ago, someone investing £500 a year into a pension over 25 years would have received an annual income of £13,700. Now, with annuity rates so low, the same amount over the same timeframe would provide a pension with an annual income of just £3,800.

The Alternative – an ISA

So, if you are wary of annuities, what other pension options are available to you? Well you could think about using an ISA instead of a pension. An ISA or Individual Savings Account is an investment that, unlike a pension, you will not be taxed on when you choose to take the money out.

Just like with a SIPP, with an ISA you can choose which investments to invest in. However, your options will be limited, for example you cannot invest in commercial property in an ISA.

With an ISA, you will also have access to your savings at any time. This may seem like an advantage but for many people, the temptation of their pension pot at their fingertips would be too great to resist. At least with a pension you are not allowed to get your hands on the money until you retire.

Choosing an ISA or a SIPP

Opinion will always be divided about whether an ISA or a SIPP is the best place for your retirement savings. Both have their benefits and their drawbacks. Some investors will decide that the taxation benefits of a SIPP make them the best bet, whereas other will argue that if you don’t want to be forced into taking an annuity, an ISA would be the best home for your pension pot.

Whatever you choose, both investments put you in control of your pensions savings, and that is a considerable improvement for investors.